July 19, 2002
Questioning $1 Million Fee in a Needle Deal
By BARRY MEIER with MARY WILLIAMS WALSH
group that buys medical supplies for a third of the nation's hospitals received two
highly unusual payments totaling $1.1 million from a company that had received the
exclusive right to market hypodermic needles and other products to the group's
Several legal experts said in interviews that they found the payments to the buying
group, Novation, troubling because they might be construed as kickbacks if they
were used to obtain business.
In one case, Novation said the nation's biggest needle maker, Becton Dickinson &
Company, paid it $1 million in "special marketing" fees in 2000 in connection with a
three-year contract for syringes and needles. The payment came at a time when
health care workers and others were saying that some Becton Dickinson products did
not provide enough protection for medical workers against accidental needle sticks,
which can transmit pathogens like the AIDS virus. Smaller manufacturers were also
beginning to challenge Becton Dickinson with new safety products.
Becton Dickinson, a major maker of medical devices and diagnostic systems based in
Franklin Lakes, N.J., said it had also made a separate payment of $100,000 to
Novation in connection with a smaller, four-year contract for intravenous catheters
that took effect in 1999.
Novation, which is based in Irving, Tex., did not specifically tell its member
hospitals about the special payments, and it did not respond to repeated requests for
documents showing that it had disclosed the fees. Novation had previously said in
Senate testimony that it disclosed "all fee information" to its members.
Senator Herb Kohl, the Wisconsin Democrat who heads a Senate panel that is
investigating big buying groups like Novation, said he did not know of the Becton
Dickinson payments to Novation.
"Why do they have to give them a million dollars?" Senator Kohl asked in an
interview. "Why should they do that if it's a question of the supplier having the best
product — best quality, best price?"
He said he was particularly troubled that Novation had signed an exclusive contract
with Becton Dickinson that did not include products from any competitors.
The payments came to light through Becton Dickinson documents obtained from a
former Novation employee and a federal official, and they were subsequently
confirmed by both Becton Dickinson and Novation. The payments are among about a
dozen similar ones that Novation said it had accepted from medical product
companies. The group would not identify those companies or the amounts received.
Becton Dickinson and Novation say that the payments were proper — intended to
compensate for a lower sales commission on the products involved — and that the
money played no role in the awarding of the contracts.
But James Sheehan, an assistant United States attorney in Philadelphia who
specializes in health care cases, said he had "serious questions" about whether such
payments were legal under federal laws against kickbacks. Citing Justice Department
rules, he declined to say whether he would investigate.
Buying groups are legally allowed to receive fees from manufacturers based on a
percentage of sales to hospitals. But in approving that exemption from federal rules
against kickbacks, lawmakers urged regulators to monitor the fees "for possible
abuse, particularly those in excess of 3 percent" of sales. Some buying groups say
that they will not accept fees above 3 percent and that they do not take '`special
Documents show that Becton Dickinson agreed to pay the special $1 million fee to
Novation as well as a 3 percent sales fee.
Buying groups like Novation are supposed to help hold down costs for hospitals
while insuring that hospitals buy the best and safest medical products. But unlike
purchasing agents in other industries, hospital buying groups are not financed by the
buyers of products, in this case the hospitals. Rather, they are financed by the
medical product manufacturers, raising questions about whose interests they serve.
A preliminary Congressional study this year found that hospitals can often buy
hypodermic safety needles more cheaply outside the big buying groups. The groups
disputed that finding.
The disclosure of the Becton Dickinson payments gives new ammunition to critics
who say that big buying groups favor companies that can afford to pay large fees,
putting smaller manufacturers at a disadvantage even when their products may be
The panel led by Senator Kohl has asked buying groups to adopt significant changes
by the end of July or face government action. The Federal Trade Commission is also
looking into whether the groups are inhibiting competition. Those actions followed a
series of articles in The New York Times about the groups' business practices.
Health care workers and representatives of competing syringe companies also reacted
with anger when they learned of Becton Dickinson's payments to Novation.
"When you are talking about products that can make the difference between life and
death, it shouldn't be about financial incentives," said Karen Daley, a Massachusetts
nurse who contracted the AIDS virus after an accidental needle stick at a Boston
Thomas J. Shaw, chief executive of Retractable Technologies Inc., a rival syringe
and needle manufacturer in Little Elm, Tex., lost out to Becton Dickinson on the
Novation contract. "They didn't ask us to pay them a $1 million fee," Mr. Shaw said,
calling the payment improper.
Retractable has sued in federal court in Texarkana, Tex., accusing Novation and
Becton Dickinson, among others, of violating antitrust laws by conspiring to use
buying groups to monopolize the hypodermic needle market. All the defendants have
Novation said the extra $1 million was intended to offset lost revenue, because
Becton Dickinson's payment of 3 percent on each sale was lower than the percentage
paid by the previous contractor.
Becton Dickinson says it ended up making only about $800,000 in added payments
in connection with the hypodermic contract, though Novation says the company paid
the full amount.
Novation said it was Becton Dickinson that offered the extra payment, while Becton
Dickinson said it was "negotiated by Novation."
Officials of both Novation and Becton Dickinson declined to be interviewed for this
article. But in written responses to questions, both denied that the added payments
had any influence on the contract awards for hypodermics or catheters.
For his part, Gary M. Cohen, president of Becton Dickinson's medical systems
division, wrote that his company won the Novation contracts on the basis of "decades
of leadership in quality, value and service."
Novation said the contracts were awarded on "clinical quality factors" and with input
from hospital members. The group said that Becton Dickinson would have won the
contract without the extra money and that part of the added revenue was distributed
to member hospitals.
Mr. Cohen also said that Becton Dickinson had taken the lead in developing safer
products to help eliminate accidental needle sticks. "No other company has done as
much as we have to protect health care workers from needle-stick injuries," Mr.
But in October 1999, the same month Novation awarded the hypodermic contract to
Becton Dickinson, the nation's most respected testing laboratory for medical products
rated Becton Dickinson's best-selling safety syringe, called the SafetyLok,
"unacceptable," saying it might actually cause needle sticks.
In a later study in 2001, the testing lab, called ECRI, upgraded the device to "not
recommended." As of last October, the SafetyLok was no longer Becton Dickinson's
best-selling safety syringe. Another safety syringe produced by the company had
higher ratings in both tests.
Separately, Becton Dickinson says it agreed to pay a special fee of $100,000 for the
IV catheter contract "to offset an anticipated loss of revenue due to a change in
contracts." Novation had previously bought its IV catheters from another company.
Novation also said the payment was intended to increase its revenue. But a former
Novation official said the $100,000 payment was unrelated to the contract and was
intended to help Novation pay for a new communication system.
These special fees are a potential problem, federal regulators say, because they were
made early in each contract. Two years ago, the inspector general of what is now
called the Centers for Medicare and Medicaid Services issued an informal advisory
opinion, asserting that substantial upfront payments "appear to pose a significant risk
of fraud and abuse."
That opinion stated that such payments were "difficult to trace" and tended to lock in
Novation says it received about a dozen special advance payments from suppliers
that were awarded contracts. But the group says it recently stopped taking advance
payments because of concerns raised by hospitals, though it declined to say when it
had received the last one.
Mr. Sheehan, the federal prosecutor, said that based on the limited documents he had
reviewed, the special marketing fees did not appear to reflect any specific services in
exchange for the payments, raising questions to him about why they were paid.
Robert Simpson, chief executive of Cooperative Services of Florida, a buying agent
that contracts for supplies used at several hospitals that belong to Novation, said the
special marketing fees might simply inflate product prices — the opposite of what
buying groups are supposed to do.
Larry Dickson, an official for Providence Health System in Seattle, which buys
through Novation, said he did not know about the special payments and called them
Julia Naunheim Hipps, a nurse and needle-stick victim from Missouri, said big
buying groups like Novation had served as the biggest roadblock to getting safer
products into hospitals because of their financial ties to big manufacturers like
Ms. Hipps said she contracted hepatitis C from an infected needle in 1999. "The
concept of group purchasing is now a detriment to those working in the health care
industry," she said in written testimony submitted to the Senate panel that is
investigating the big buying groups.
Ms. Hipps said she felt angry and betrayed by the way hospitals buy medical
supplies. "I am the end result," she said.